Moody's: Lawsuit threatens Newark's fiscal health

An outstanding lawsuit that could force Newark to use $120 million in payroll and parking taxes collected from 1999 through 2004 for tax relief is a major liability to the city's fiscal health, according to a report from Moody's Investors Service.

In confirming a Baa2 bond rating with a stable outlook for Newark's $302 million in long-term debt and assigning it's highest short-term rating to $68 million in general improvement and school bonds, Moody's said a judgment against Newark "could slow the city's financial recovery."

"Any time we see a potential liability of that magnitude it's worth keeping track of. It's a large number," said Edith Behr, vice president and senior analyst for Moody's.

Superior Court Judge Rachel N. Davidson ruled in 2004 that Newark had misused the taxes, which the city is allowed to collect under legislation enacted 1999. The Revaluation Relief Act permitted Newark to phase in property tax revaluation over five years. The legislation directed the city to set aside payroll and property taxes in a dedicated account "solely to fund revaluation relief abatements."

Newark obtained a waiver on the requirement for 2000 only from the state Department of Community Affairs. The city then continued to direct parking and payroll taxes into the general budget instead of setting it aside for revaluation relief in 2001, 2002 and 2003.

After Davidson's ruling, Newark's state representatives, including then Mayor Sharpe James, pushed through legislation retroactive to 1999 that would allow the city to collect the special taxes without any conditions. In August of 2005, Davidson tossed out the lawsuit, effectively upholding the new state law.

Montclair attorney Ira Karasick who filed the suit with several Newark residents as plaintiffs appealed that ruling. Tacking on interest, Karasick said he believes the still-pending lawsuit could bring a judgment as high as $200 million.

"There was a group of people who were entitled to getting tax relief," said Karasick. "It's a major exposure."

City officials argued that the money was used in the general budget, thereby effectively causing tax relief but Karasick and the plaintiffs disagreed. The money should have been directly applied to homeowners to ease the tax burden caused on some by the city's first revaluation in 40 years.

"I can see tax relief going back to property owners and certain people affected by the revaluation. They were to get tax relief which was to be given to them by a credit against their taxes," said Karasick. "I don't see a situation where its moot."

Esmeralda Diaz Cameron, a spokeswoman for Mayor Cory Booker, said the city is "extremely confident" the dismissal of the lawsuit will be upheld.

"It's the opinion of the Corporation Counsel that the dismissal will be upheld by the Appellate Division," said Diaz Cameron.